Tuesday, February 23, 2010

“Monetary crank” was never exactly a household phrase, but I know for certain it was much more widely used and understood a century ago than it is today. If you had nutty ideas about money (such as: “cranking out lots of it will make us wealthy”), you were a monetary crank. We don’t hear the term much these days even though the world is full of people — some in high places — whose pictures ought to be in the dictionary right next to the term.

There must have been some monetary cranks around as early as ancient Israel, at the time of the prophet Isaiah, who took his people to task for allowing the depreciation of their money. “Thy silver has become dross, thy wine mixed with water,” admonished the prophet.

John Law of Scotland ranks as one of history’s more colorful monetary cranks. When Louis XIV died in 1715, he left the French treasury flat broke and a five-year-old successor on the throne. It wasn’t hard for the snake-oil salesman Law to secure an audience with the toddler king’s regent, Philippe d’Orléans. Philippe embraced Law’s recommendation, which was to simply print the money the regime needed. The regent then appointed Law the official controller general of finances, a perch from which he orchestrated a massive hyperinflation that ruined the currency in a mere five years.

The French did it all over again during the 1790s, when Robespierre and the revolutionaries argued that the recipe for a currency of reliable value was paper and ink mixed with guns, bayonets, and confiscated Catholic Church property. That little ride took about five years too — and ended in a similar wreck.

Monetary cranks appeared in America in the nineteenth century but President Ulysses S. Grant’s treasury secretary, Benjamin Bristow, was not one of them. In his annual message of 1874, Bristow declared:

The history of irredeemable paper cur­rency repeats itself whenever and wher­ever it is used. It increases present prices, deludes the laborer with the idea that he is getting higher wages, and brings a fictitious prosperity from which follow inflation of business and credit and excess of enterprise in ever-increasing ratio, until it is discovered that trade and commerce have become fatally diseased, when confidence is de­stroyed, and then comes the shock to credit, followed by disaster and depres­sion, and a demand for relief by further issues. . . . The universal use of, and reliance on, such a currency tends to blunt the moral sense and impair the natural self-dependence of the people, and trains them to the belief that the Government must directly assist their individual fortunes and business, help them in their personal affairs, and ena­ble them to discharge their debts by partial payment. This inconvertible paper currency begets the delusion that the remedy for private pecuniary dis­tress is in legislative measures, and makes the people unmindful of the fact that the true remedy is in greater pro­duction and less spending, and that real prosperity comes only from individual effort and thrift.

Bristow’s warning was not enough to prevent Congress in the last quarter of the nineteenth century from buying into the nostrums of the monetary cranks of that era, the “silverites.” Here’s that story:

The paper greenback inflation of the Civil War era left many Americans suspicious of plans to revive a policy of deliberate paper-money ex­pansion on behalf of any special interest. In 1875 Congress passed the Specie Resumption Act, declaring that the gov­ernment would redeem the greenbacks at par in gold on January 1, 1879. To protect the redemption of the green­backs, it was thought that the Treasury would have to maintain a minimum of $100 million in gold on reserve. The most that the inflationist cranks got was a government pledge not to cancel the greenbacks once redeemed but to reissue them so that the total num­ber outstanding would remain the same.

Hi Yo Silver!

The inflationists’ attention then turned to another medium: silver. The greenbackers became “silverites,” and their rallying cry be­came “Free Silver at 16 to 1,” meaning they wanted the federal government to buy as much silver as was available and stand ready to redeem 16 ounces of it for an ounce of gold. They also wanted legal tender paper silver certificates printed as well. They had enough influence to secure passage of the Bland-Allison Act in February 1878 — the first of the acts putting the government in the busi­ness of purchasing silver for coinage.

Bland-Allison passed over President Rutherford B. Hayes’s veto. In his veto message Hayes noted that “A currency worth less than it purports to be worth will in the end defraud not only creditors, but all who are engaged in legitimate busi­ness, and none more surely than those who are dependent on their daily labor for their daily bread.”

The silverite cranks were dissat­isfied with Bland-Allison because it did not go far enough. It did not provide for free and unlimited government purchase and coinage of silver at 16 to 1. The only silver to be coined would be the two to four mil­lion dollars’ worth that the govern­ment purchased each month, and the Treasury, while the law was on the books, rarely bought more than the minimum amount.

Silver producers in particular had a vested interest in the matter, for the market price of silver had begun a long-term decline in the 1870s. Securing a government pledge to buy silver at a higher price than could be obtained in the free market was an obviously lucrative arrangement. As the market ratio of silver to gold steadily rose above 16 to 1, the profit potential became enormous.

The silverites’ drive for favorable legislation culminated in the Sherman Silver Purchase Act of 1890, which replaced Bland-Allison. The Sherman Act stipulated that the Treasury had to purchase 4.5 million ounces of silver per month, or roughly twice the amount under Bland-Allison. The silver purchases mandated by the law represented almost the entire output of American silver mines.

An inflationary boom yielded to panic and a deflationary bust in 1893. President Grover Cleveland led the successful fight to repeal the silver legislation, an indispensable step toward restoration of a sound currency.

The monetary cranks didn’t disappear, however. Their chief intellectual supporter, William “Coin” Harvey, continued to agitate for silver and paper-based inflation. Cleveland’s own party nominated a monetary crank, William Jennings Bryan, for president in 1896. The silver issue didn’t go away until the Gold Standard Act of 1900 settled it.

Maybe we don’t hear the words “monetary crank” these days because the culprits truly have vanished and everybody has smartened up when it comes to money. But wait a minute! If that were the case, how do we explain a dollar that’s now worth about a nickel of its 1913 value, the year something called the Federal Reserve was created?

Hmm. Maybe the only people who have smartened up are the monetary cranks themselves. They’re now wearing pinstripe suits and instead of selling inflation per se, they’re hawking “stimulus” and “full employment.”

Lawrence Reed is the president of the Foundation for Economic Education. Reprinted with permission.

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I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

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